Digital marketing, and especially Pay-per-Click (PPC) advertising, is loaded with data that requires constant monitoring and analyzation. There are a number of Key Performance Indicators (KPIs) for advertisers to keep their eye on to gauge the performance and overall success of their advertising campaign efforts. KPIs can vary depending on the type of business being ran, whether it be eCommerce or Lead Generation. For today, we’ll focus on eCommerce and most specifically ROAS.
ROAS At A Glance
What is ROAS, how is it calculated and why is it a main KPI for eCommerce businesses? ROAS stands for return-on-ad spend and you can calculate ROAS by dividing ad spend from the revenue that was generated from your ads. For example, if an ad campaign generated $10,000 in revenue while spending $4,000, ROAS would be 250%
Beyond being displayed as a percentage, ROAS can be looked at as how many dollars are earned in revenue with each dollar you spend on advertising and advertising. In the above example, the ratio is 2.5:1. In other words, for every dollar that is put towards advertising, there is $2.50 generated in revenue. A ROAS of 100%, or ratio of 1:1, is the break even point when revenue matches the cost of advertising.
Why Is ROAS Important?
ROAS is an important KPI for eCommerce businesses because it aides in evaluating the success of your advertising campaign and strategy, can help identify any optimizations that need to be made, or if a strategy pivot is needed to increase effectiveness. ROAS allows advertisers to make decisions based on analytics and data so money is being allocated to the right channels, the right way. Along with these benefits, ROAS paints a picture of how advertising campaigns and marketing efforts are affecting a business’ overall bottom line, which is particularly important.
A company’s bottom line needs to remain top of mind when looking at ROAS. A positive ROAS doesn’t necessarily mean that a business is making a profit. There are many cases where a positive ROAS still lands a company in the red. Advertising costs are far from the only expenses that a business needs to account for. For example, if an agency is being used to run online marketing campaigns, then their fee must be accounted for as an additional cost. If there is an in house team handling digital marketing campaigns, then payroll is an additional ad cost that can’t be ignored.
Using the example from above, a ROAS of 250% appears strong on the surface. Digging a little deeper, that ROAS may not be enough to keep a business afloat. Let’s say a company is using a digital marketing agency that is a cost of $4,500/month to run all their campaigns. This alone drops ROAS from 250% to 117%, which is barely breaking even. This doesn’t even include cost of goods sold or the fixed costs associated with running a business. If only looking at ROAS, it can be misleading when comparing said figure to the big picture and holistic view of a business’ heath.
ROAS is a great measure of the success of advertising campaigns, but doesn’t fully illustrate the profitability and effectiveness of a business. What constitutes a strong ROAS will vary depending on industry and other factors associated with certain market conditions. With that being said, knowledge of all facets of a business is crucial in determining the target ROAS that needs to be hit to become profitable and allow a business to scale. While ROAS has some limitations, however, it is key to optimizing and building strong advertising campaigns and is one of the most important KPIs for all eCommerce businesses.